July 10, 2019

Rolling Student Loans into mortgages requires careful consideration

With untapped home equity at an all-time high of $14.4 trillion, homeowners could be poised to start cashing in.

College educations, while extremely valuable, have become prohibitively expensive in the last few decades. Some 44 million Americans have amassed $1.5 trillion in student loan debt, carrying an average balance of $40,000.

It can feel like an enormous weight, and many borrowers seek to reduce the debt as quickly as possible. One way you can do that is to roll it into your mortgage. In 2017, Fannie Mae added the Student Loan Cash-out refinance option.

However, tying that debt to your mortgage can have serious consequences. Make sure you understand the consequences before rolling unsecured debt into your home.

With Fannie Mae adjusting the loan level depending on risk, some borrowers may pay as little as 1 percent of the loan for this arrangement.

Along with what will probably be a lower interest rate, many borrowers like the concept of "streamlining," or consolidating all their large debts into one payment.

Paying one loan with another may seem amazing - after all, you have seemingly made a big chunk of debt "disappear." But it’s no magic trick. You still owe the money, you’ve just changed the terms.

There’s no one-size-fits-all formula. For some people, especially those who have a stable income and can pay down debt fast, lowering their student loan interest rate through refinancing makes sense. For others, the benefits of refinancing may be an illusion.

First there’s the tax considerations. As of this year, home equity debt interest is only deductible if it's used to buy, build or improve your home, not if it’s for student loans.

Rolling student loans into a mortgage also means giving up the ability to defer the student loans during difficult financial times. Once they are part of your mortgage, it’s a required monthly payment.

Additionally, you give up any eligibility for potential student debt forgiveness programs down the road.

However, you still might be able to pay off the debt faster if the interest rate is lower than what you were paying. PLUS loans and private student loan borrowers can potentially save more than those with subsidized federal student loans.